Brazil Issues Regulation on Low-Tax Jurisdictions; Swiss, Dutch Companies Removed From Blacklist

Less than two weeks after updating its list of low-tax jurisdictions and special tax regimes, Brazil's Federal Revenue Department (FRD) has issued a new regulation narrowing the concept of special tax regime for holding companies located in the Netherlands and Denmark. The regulation also establishes procedures for listed locations to request review of their listed status.

Normative Instruction 1045/2010, published in Brazil's official gazette of June 24, amends aspects of Normative Instruction 1037/2010 on low-tax jurisdictions and special tax regimes.

Article 1 of Normative Instruction 1045/2010 redefines the concept of special tax regime for holding companies formed under the laws of Denmark and the Netherlands. While Instruction 1037/2010 assigned special tax regime status to any holding companies formed under the laws of the two countries, Instruction 1045/2010 limits special tax regime status to holding companies that do not carry out substantial economic activity.

It is important to note that the substantial economic activity rule applies only to holding companies formed under Danish or Dutch laws. For the other listed special tax regimes, this requirement, which works as a limitation to the FRD, is not applicable.

Article 2 of Normative Instruction 1045/2010 establishes a procedure whereby locations may file a request for review of their status as a listed location or a location with a special tax regime. Such a request:

  • must be filed by a representative of the government of the listed country or location;
  • must be addressed to the chief commissioner of the FRD;
  • must be accompanied by proof of the content and validity of the tax laws subject to review of status; and
  • may call for the suspension of the effects of the listing on transactions with the filing country.

The FRD's chief commissioner has the power to determine the suspension and/or exclusion of a country/tax regime from the current list. No appeal is available if the request for review is rejected or dismissed.

The new procedure is a positive development that demonstrates the FRD's intent to routinely review status whenever a listed location can prove it should not have such status.

Swiss, Dutch Holding Companies Removed From Blacklist

One day after publication of Normative Instruction 1045/2010, Brazil's Federal Revenue Department used the regulation to suspend the inclusion of Swiss and Dutch holding companies from the list.

Brazil's official gazette of June 25 published Executive Declaratory Act 11, which suspends the inclusion of Switzerland as a low-tax jurisdiction. Switzerland was included under Normative Instruction 1037 of June 7. The act suspended this inclusion after the Swiss government submitted a formal request for review to the FRD.

Likewise, the same edition of the official gazette published Executive Declaratory Act 10 suspending the inclusion of the Netherlands as a country with a special tax regime applicable to holding companies formed under Dutch laws. The act states that the suspension was a consequence of a request for review submitted by the Dutch government.

Therefore, until a review is conducted by the FRD, transactions with parties located in Switzerland or with Dutch holding companies are not subject to the stricter, more burdensome rules generally applicable to listed locations/tax regimes, such as transfer pricing, higher withholding tax rates, and thin capitalization rules. After the review is complete, the FRD will likely issue a new act confirming or rejecting the exclusions definitively.

- David Roberto R. Soares da Silva, partner, Battella, Lasmar & Silva Advogados, São Paulo

(Article originally published in the June 28, 2010 edition of World Tax Daily - Copyrights Tax Analysts)